There is no easy answer to this question. However, if the company has accurate financial information that is well documented by Tax Returns and Financials and at the same time has been priced fairly in the current business climate, it should take approximately 12 months after the Executive Summary has been prepared. According to the SBA, it averages 6 to 9 months for the Seller to be speaking to a qualified interested buyer prospect and another 6 to 9 months for the transaction to close.
For our clients, we review a number of documents (Financial Statements, Tax Returns, Organizational Chart, Strategic Plans, Listing of Assets included with sale and etc.) to determine a range of values that the Company will likely sell for in the current market environment. We will be looking at industry multiples for similar business sales as well as evaluating the company as it compares to competitors. However, in every instance, we encourage our clients to get an independent appraisal from a certified expert. Often, we supply a list of companies performing valuations for some of the best lending institutions we use for financing the transaction.
As a firm, we have addressed this issue in our November monthly blog. Briefly, if you are presently profitable with revenues and profits increasing in the past 3 years and the economy looks very positive, this would be the first consideration. Secondarily, what is the motivating factor driving you to sell your business now. Some of the primary considerations might be: a) it is time to retire, b) you, your partner or your spouse have a serious illness, c) you are extremely fatigued by the responsibility of running a business, d) divorce or marital difficulties and etc. In summary, if you are profitable in a dynamic economy and this intersects with a motivating factor to sell your business, this is probably as good a time as ever to sell your business.
Needless to say, there is no perfect business. However, there are certain ingredients that make a business a more compelling opportunity. They are as follows:
a) Much of the business comes from repeat customers constituting an annuitized revenue stream.
b) The business does not have any customers comprising more than 5 to 10% of overall revenues. This is referred to as Customer Concentration Ratio.
c) The company is not reliant on any one sector of the economy but sells through a cross section of the economy.
d) The company has a three year history of increasing revenues and free cash flow coupled with a history of attractive gross profit margins.
e) The company has a strategic competitive advantage in the marketplace (for example a patent or other intellectual property).
f) The transaction is attractive to potential lenders including the SBA, Banks and other financing institutions.
We will never distribute the Executive Memorandum to a prospective buyer without a signed Confidentiality Agreement. This agreement was drafted by our state association with a committee of M&A Attorneys and Qualified Brokers.
In order to achieve the greatest value for your business, we encourage all Sellers to be flexible with respect to the transition time requested by a new Buyer. We have seen employment agreements run for as short as 3 months and some as long as 5 years. An average length of time probably falls into the 6 to 12 month range. Prior to exiting, we counsel the Seller on being prepared to be around for 12 to 18 months after close.
The following factors will help determine whether you are ready to sell your business:
a) You have an organized file of financial records including monthly/quarterly financials, annual tax returns, list of assets to be included in the sale, an org chart with a strategic plan.
b) Your company has been profitable for the last 3 to 4 years with increasing revenues and profits.
c) A reasonable price range has been determined for your business and you understand what taxes will be due when the business is sold.
d) Once you have finished transitioning in a new buyer, you have a good idea what you will do with your spare time.
e) With your financial planner, you have outlined how you will invest the net proceeds from the sale and how they will be integrated into your retirement plan.
In virtually every transaction above $1,000,000, the company will see both individual buyers as well as strategic buyers. In most cases, an individual buyer will pay a premium over other types of buyers since he is looking for a job/career and needs everything to be in place in order to increase the probability of success. In a number of scenarios, a strategic buyer will pay a premium because of the inherent synergies in the transaction. Those synergies might include intellectual property as part of the assets sold or opportunities to cross pollinate customers of Target Company with products or services of parent company and vice-versa. Lastly, the possibility of significant cost synergies is present. In the event that the Company has free cash flow in excess of $2,000,000 ($1,000,000 in fewer cases), a third dimension of buyers enters the picture. Financial Buyers with the biggest subset among them as Private Equity Groups (PEGs) can be an excellent buyer..